Ireland unveils euro5.5 billion bank bailout

Three of Ireland's major banks on Monday welcomed a euro5.5 billion ($7.7 billion) government bailout designed to boost their cash reserves and lending power in the face of deepening recession.

Finance Minister Brian Lenihan said the boards of the three banks – Allied Irish, Bank of Ireland and Anglo-Irish – would issue preference shares paying fixed dividends to the government in exchange for the aid. The plan requires shareholder approval at emergency meetings starting next month.

The plan is designed to restore international confidence in Ireland's banking sector, which faces rising loan defaults and the likelihood of worse to come in 2009. Irish banking shares have lost more than 90 percent of their value over the past year – a fall uninterrupted by the government's sweeping decision two months ago to insure all deposits and the banks' own debt commitments.

The government said it would give Allied Irish Banks PLC, Ireland's biggest bank, and No. 2 Bank of Ireland euro2 billion each. In return the government will receive preference shares paying a fixed 8 percent dividend – or euro160 million a year from each bank – as well as 25 percent of voting rights on each bank's board of directors.

Anglo-Irish Bank Corp., a specialist lender heavily exposed to the collapse of Ireland's property and construction markets, would fall under government control.

The government has agreed to pay euro1.5 billion for preference shares in Anglo-Irish that will pay a 10 percent fixed dividend, or euro150 million annually. The government would receive 75 percent of voting rights.

Analysts said the government had given generous terms to the Irish banks – but questioned whether euro5.5 billion would be enough.

"This is a fantastic deal for Ireland's banks and a very bad deal for the taxpayer," said Shane Ross, an Irish senator and financial commentator.

Ross said the government should have insisted on majority voting rights and a total overhaul of the boards at Allied Irish and Bank of Ireland.

Lenihan said the government also was willing to underwrite the issuing of euro1 billion each in new Allied Irish and Bank of Ireland shares. This means the government would purchase any new shares that existing shareholders decline to buy.

Both banks welcomed the aid and said they were interested in persuading their existing shareholders – who have seen their stock fall in value by more than 90 percent over the past year – to buy up to euro1 billion in newly issued shares. Issuing new shares dilutes the value of existing shares.

Allied Irish insisted it had more than enough capital to operate, and could raise more capital by selling off assets such as its minority stake in M&T Bank Corp. of New York.

Allied Irish said the government's euro2 billion would raise the bank's core capital available to about 7.5 percent of the value of its loan book, while a new stock issue would raise it to 8.5 percent.

Lenihan said all three banks could pay back the aid at face value within the next five years, or 125 percent of its value after five years. He said the government would provide more aid – specifically to Anglo-Irish – if the banks' share values and ability to lend didn't markedly improve.

Anglo-Irish Chairman Donal O'Connor said the government intervention "ensures that the bank will continue to be a sound and viable institution."

O'Connor was appointed chairman on Friday after the incumbent, Sean FitzPatrick, resigned after admitting he had borrowed euro87 million from the bank and hid this fact from shareholders for eight years. The scandal also forced out the bank's chief executive, David Drumm.

Lenihan said the government's representatives on the boards of all three banks would ensure that they increase mortgage lending by 30 percent and loans to small business by 10 percent.

Ireland's long-booming economy has gone swiftly into reverse over the past year. In 2009 the government expects the economy to decline by at least 4 percent, unemployment to rise above 10 percent, and deficit spending to surge amid falling tax collections and rising welfare bills.